Tackling the cost of living crisis could be key to whether the first Labour Government in 14 years succeeds or fails.
Much of the responsibility for tackling this ever-present challenge lies with Chancellor Rachel Reeves – the woman responsible for helming the UK economy for the next four and half years.
She has, however, been dealt a difficult hand, with rising energy bills, persistent inflation, sluggish economic growth and rising mortgage costs all eating into the incomes of British voters.
Leading an economy is an unenviable task, as Reeves must balance her own strict fiscal rules and skittish financial markets against a desire to help people feel better off.
She also has very few levers to pull, as major tax changes have been ruled out, and the tight economic situation has left her with very little wiggle room in the nation’s finances.
There are, however, a few options on the table that could help Reeves tackle the cost of living crisis without major implications for the Treasury.
The problem
Despite Russia’s invasion of Ukraine happening over a thousand miles away, its effects have still been felt closer to home. Since 2022, energy prices have experienced significant volatility due to the energy crisis triggered by the conflict, as European countries scrambled to replace Russian gas supplies.
The previous Conservative government brought in the energy price guarantee that year, which capped the maximum gas and energy bills a household could pay at £2,500. However, this scheme ended in 2024 as rates stabilised.
The UK has also had an energy price cap since 2019, set by the energy regulator Ofgem, which limits the rates a supplier can charge for their default tariffs.
This helps protect millions of household energy customers from volatility in energy prices, but this fact is small comfort when Ofgem, the energy regulator, decides that the cap has to rise.
According to Cornwall Insight, the energy price cap is set to rise to approximately £1,823 per year from April for a typical household, up from £1,738.
Consumer advocacy groups have expressed concerns that this increase will push more households into fuel poverty. According to National Energy Action, over 6.5 million UK households are already struggling to afford their energy bills, and the April rise could worsen this situation.
Potential solutions
To tackle the growing impact of energy bills and help boost economic growth, the Government is understood to be considering “zonal” pricing, which would see rates lowered in certain regions of the UK.
The i Paper exclusively reported last month that such a scheme was “on the table” and that officials were exploring how it could be used to drive growth in Britain’s advanced manufacturing sector and encourage businesses to build factories in regions with abundant, cheaper energy.
Such a system would mean areas like Scotland or the North of England, which have higher levels of electricity generation from offshore wind farms and relatively lower demand, would have lower prices. On the other hand, it would mean that the South of England, with its dense population and limited renewable energy, would have higher prices.
The future of this idea, however, has not been confirmed and cannot be implemented in time to offset the April price rise.
In the meantime, there are some existing schemes that the Government could either expand or boost awareness of, such as the warm home discount scheme. It provides a £150 discount to eligible low-income households and was used by 2.5 million in the 2022 to 2023 financial year, an increase of 400,000 from the previous year.
However, while there are no statistics on how many eligible households are missing out on this discount, it is expected to be quite low. The majority of eligible claimants receive their discount on their bills automatically, with only around 8 per cent having to contact the scheme’s helpline to claim it.
And, despite the limited options, concerns over rising energy prices are also unlikely to go away. There have been warnings that a lack of sufficient gas reserves, coupled with the push to rely on renewable energy and the continued decommissioning of the country’s remaining nuclear power stations, will leave consumers facing higher bills for the foreseeable future.
Last month’s Arctic blast meant Britain was forced to pay gas power stations £5,500 per megawatt hour for just 400MW, as opposed to the usual £45 to £65, which pushes up energy bills and feeds into Ofgem’s next price cap decision later this month for the period starting in April.
The problem
After a period of aggressive interest rate rises, the Bank of England has begun lowering rates to support economic growth. Earlier this month, it cut the base interest rate from 4.75 per cent to 4.5 per cent – the lowest level for 18 months.
This was the third cut since August 2024, but the Bank’s Governor, Andrew Bailey, said it will take a “gradual and careful” approach to further reductions. These cuts matter because the rate is used as a basis by lenders setting rates on mortgages and loans.
Experts are predicting that mortgage rates, which have been dropping over the past year, will continue to fall across 2025 and brokers have told The i Paper that rates for some customers could reach as low as 3.5 per cent by December 2025.
However, despite these cuts, many mortgage holders are still experiencing high costs, and lenders have been slow to pass on reductions, meaning mortgage rates remain elevated compared to pre-pandemic levels.
This has led to an affordability crisis, with first-time buyers struggling to enter the housing market and existing homeowners facing higher monthly repayments.
Rental prices have also surged, adding further financial strain to households. According to the Office for National Statistics (ONS), private rents increased by 8.7 per cent in the 12 months to January 2025, down slightly from 9.0 per cent in the 12 months to December 2024.
Despite this marginal decline, renters are still facing historically high costs, with affordability worsening in many cities.
The best thing that Reeves can do to help mortgage rates is to keep inflation low, which will make future interest rate cuts probable. Outside of that, much of her focus has been on helping first-time buyers frozen out of the market due to high house prices and difficulties obtaining a mortgage.
The Chancellor met with mortgage lenders in January, urging them to reconsider the affordability rules that currently limit the options for those looking to buy their first home.
According to The Times, options discussed included increasing the salary multiplier used to calculate how much someone can borrow, allowing banks to include evidence of rental payments when issuing mortgages and cutting the amount of capital banks need to keep in reserve for 90 per cent loan-to-value mortgages.
Ministers have also committed to implementing a “new, permanent, comprehensive mortgage guarantee scheme” which could provide much-needed support for first-time buyers struggling with affordability. The current scheme, which helps buyers secure mortgages with smaller deposits, is due to expire in June 2025, meaning the Government has a few months left to announce the full details of its replacement.
Another option that has been touted is reforming the lifetime ISA (Lisa) withdrawal penalty to help more buyers. Currently, savers can withdraw money from a Lisa without a penalty once they turn 60 or if they use it to buy a property costing up to £450,000. If these rules are breached, they face a 25 per cent penalty.
There have been calls to boost the upper limit, which has remained unchanged since 2017, to reflect increased house prices, and to reduce the penalty for early withdrawals. Advocates of both argue these measures could give savers greater flexibility and choice when saving for a deposit and buying their first home.
One more avenue the Government could explore is reviving the Help to Buy scheme, which ran from 2013 to 2023 and offered equity loans on new build properties for first-time buyers but ended in 2023.
Advocates of the scheme said it helped to stimulate housebuilding, but critics have argued that it incentivises developers to increase the price of properties which makes the home harder to sell in the future.
As for helping renters, the Government hopes its Renters’ Rights Bill will offer more protections for tenants by ending no-fault evictions and preventing landlords from demanding large amounts of rent upfront.
But some groups, including homelessness charity Shelter, have called for the bill to be strengthened with measures such as rent controls and a detailed landlord register.
The problem
Inflation remains a significant concern, particularly as food prices continue to rise. The latest data from the ONS shows that overall inflation stood at 3 per cent in January 2025, with food price inflation increasing from 1.9 per cent to 3.1 per cent over the same period.
Essential grocery items such as bread, dairy, and fresh produce have seen some of the steepest increases, placing additional strain on low-income households. And the pain isn’t over, as modelling by the British Retail Consortium has suggested that food prices will rise by an average of 4.2 per cent in the second half of the year.
The lobby group said that much of this rise is expected to be driven by rising employer national insurance contributions, an increase in the National Living Wage and new packaging levies driving up costs, which will leave little room for retailers to absorb price pressures.
This increase could have a real impact on the nation’s health. Analysis from January by The Food Foundation found that 1,000 calories of healthy food such as fruit and veg costs £8.80, compared to £4.30 for the equivalent amount of less healthy food, such as ready meals and processed meats.
The charity warned that low-income families are being priced out of being able to afford to eat healthily.
Food bank usage has also surged, with the Trussell Trust reporting a 30 per cent increase in emergency food parcel distribution compared to the previous year.
Reeves has been clear that boosting growth and creating jobs is her key strategy when it comes to combating the effect of persistently high inflation in the long term. In the short term, she has very limited options when it comes to keeping food affordable.
The main reprieve for families struggling with food bills could be that the National Living Wage is set to rise to £12.21 per hour in April 2025, representing a 6.7 per cent increase. Though this change is expected to contribute to inflation, it could also ease the pressures on low-income households.
To tackle the issue of food inflation directly, the Government is working on a new food strategy, expected to be released sometime in 2025, which will look at improving food security, tackling obesity and encouraging innovation in the UK’s food sector.
Rules put in place by the Conservatives in 2018 have excluded 800,000 children growing up in poverty from free school meals. And another 200,000 eligible children are missing out because they are not registered.
The Government could seek to end this by scrapping the arbitrary household income threshold, and automatically enrolling every eligible child.
As for long-term measures to tackle inflation more broadly, the Chancellor set out a new set of plans in January. The headline of these was her backing for a third runway at Heathrow airport, which has been delayed for decades due to environmental concerns. Reeves argued that expanding Heathrow would enhance the UK’s status as a global business hub and improve connectivity.
Beyond aviation, Reeves laid out plans for a “growth corridor” between Oxford and Cambridge, which she described as a potential “Silicon Valley of Europe”. This initiative includes new reservoirs to address water shortages and investment in high-tech industries, with the Government estimating it could add £78bn to the UK economy by 2035.
The cost of living crisis has disproportionately affected lower-income families, many of whom rely on benefits or are being pushed into claiming.
The number of people receiving universal credit has also been increasing since March 2022 and was at a record high of 7.5 million in January 2025. This is the highest number of people to receive universal credit since it was introduced in 2013.
There are also increasing concerns about the number of people claiming disability and sickness benefits and the impact this is having on public finances.
As of August, 4.8 million people were claiming welfare to support them through a disability in England and Wales, an increase of 450,000. Once Scotland, where disability benefits are in the process of being devolved, is taken into consideration, the total number reaches close to five million.
This increase in benefits claimants could prove costly in the long term. According to the Institute for Fiscal Studies, spending on working-age health-related benefits rose from £36bn in 2019-20 to £48bn in 2023-24 and is projected to rise even further to more than £60bn by 2029.
Reeves has warned that the state of the public finances limits her ability to bring in sweeping changes to help struggling households. Her focus has been on getting more people off and benefits and into work.
The Labour Government plans to reduce the number of people on benefits by reforming the welfare system, including reassessing long-term sickness and disability benefits more frequently, and implementing a youth guarantee that requires individuals aged 21 and under to engage in work or training to avoid losing benefits.
Additionally, they aim to modernise Job Centres and integrate NHS, skills, and work support to address the increasing number of people out of work due to long-term sickness.
It is expected that changes to sickness and disability benefits could see up to £5bn in savings for the Treasury, but the question remains of how this saving is spent.
Work and Pensions Secretary Liz Kendall is said to be pushing for the savings to be reinvested in expanding back-to-work programmes for the long-term sick. However, the Treasury is reportedly keen to use the savings to plug gaps in the Government’s spending to prevent the need for spending cuts or tax rises in the future.
But there have been calls for benefit claimants to be helped more directly. Labour MPs are pushing for a review of the two-child benefit cap, which has been linked to higher rates of child poverty in families with three or more children by a range of experts.
Removing it would cost up to £3.5bn, and Reeves has previously argued the public finances do not allow for the cap to be scrapped. Instead, the Government launched the task force to inform its long-promised child poverty strategy, and has not ruled out considering changes to the cap and other forms of welfare to alleviate poverty.
Much of the Government’s focus has been on boosting growth to help those on benefits, but a recent report by anti-poverty charity the Joseph Rowntree Foundation warned pushing for economic growth is not enough.
It said an analysis of the Office for Budget Responsibility and Bank of England forecasts revealed that levels of poverty and deep poverty would remain “broadly flat” for the next four years “without additional action from the Government.
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